Q2 2024 Review & Q3 2024 Outlook
Skybound Group Chief Investment Strategist Jabir Sardharwalla reviews Q2 market performance and looks ahead to Q3.
The table below sets out performance for 2023 and Q4, by various asset classes and styles. The performance contrast is quite stark showing how, being univested, would have cost an investor substantial returns as a result of missing out on Q4 performance.
The close-out to the year was characterised by three factors:
Growth finished the year top performer (+37%) with a strong contribution during Q4 (+13%). Other rate sensitive sectors such as Global REITs went from negative to positive boosted by a +15.6% performance in Q4. The chart below gives a further breakdown:
The above shows the impact of falling energy prices (CRB Index, Brent and US WTI Oil) over the quarter while elsewhere (with some exceptions), performance post 27th October received a massive boost from Q4.
Also worth noting is the impact of NASDAQ type names on equities. There has been considerable mention of the Top Tech names and their performance, for example, NVIDIA +238.9%, AMD +127.6%, Palo Alto +111.3, Broadcom +99.6%, Salesforce +98.5%, Intel +90.1% - to name a few.
By stock market (local terms), Japan’s TOPIX was the star performer delivering over +28% with the S&P 500 close behind on over +26%.
In the world of fixed income, High Yield (HY) finished up strongly between +10.5% and +13.5% across EM, Europe and US. Sovereign bonds also delivered strong returns north of +4% reflecting a persevering risk-off appetite for many investors looking for safe haven investments.
So, in a nutshell, Q4 was boosted by declines in energy prices, perceived moderation in labour markets, falling inflation and therefore euphoria aroundrate cuts for the coming year. Markets priced this in and rewarded equities and corporate bonds.
2024 will be characterised by the following factors:
Israel-Gaza: some 3 months after fighting began, we have witnessed the following:
The stakes have clearly risen and the conflict is no longer isolated. The latter marks an escalation in the conflict which was not really expected last year. At the very least, it’s hard to see Hezbollah standing by doing nothing if Hamas starts crumbling. There’s no sign of the latter yet. If Hezbollah does intervene, how will Israel cope on both fronts (North and South)? Risk premium will soar, markets will take a dive and sentiment will be hit hard. This is the sort of thing recessions are made of. Until now, recession talk was overblown.
Inflation: The progress on the inflation-front during 2023 has been encouraging. It is this same progress that has fuelled euphoria around rate cuts. The decline in inflation has been more around the headline rates globally (driven by energy and food) as opposed to the core rate (driven by services).
It is early days but we have already seen a pickup in inflation per the latest US inflation print. The extent of the rise was more than analysts had expected. Worryingly, headline inflation rose at a higher rate than energy and food inflation. Even more worrying is that core inflation saw services rise strongly (+0.50% m/m) driven by shelter and healthcare costs. Concerns have also been expressed by some in markets that inflation will prove to be cyclical and show gains from time-to-time.
Insurance costs are rising too and recent events in the Middle East – especially the impact of Houthi attacks on cargo ships – is resulting in rising insurance costs as ships start to take longer routes to evade the conflict zone. This is costly. The path of inflation from here really depends on the outcome in the Middle East. If the supply side is severely hit, oil prices will escalate and oil dynamics will change. Rising oil prices is a boon for OPEC(+) members. In 2023 some questioned (and still do) whether the combined leverage of OPEC(+) was losing its “Mojo”. OPEC(+) slashed oil output at least four times last year with little impact on prices. Oil and Brent prices today ($72 and $78 pb) are less than at the time of the disruptions in the Red Sea last year when prices exceeded $80. With US shale output surging again, supply-side dynamics have been altered - at the margin, US producers are powerful enough to make a real difference helped by technological advances in drilling and better economies of scale (lower costs). The combined OPEC(+) cuts have resulted in some 6mn barrels per day of idle production capacity. Saudi Arabia – which is already pumping the least amount of crude in more than a decade – needs a fiscal break-even oil price of $88 per barrel to fund its economy and development plans. Higher oil prices are a function of either rising global demand (which is lacking right now given how subdued the global economy is looking) and/or rising geopolitical risk (as we see in the Middle East). The consequences of the former will be rising inflation which leads to rising rates. The consequences of the latter (which is the situation we find ourselves in) is much more likely to leads to a recessionary/stagflationary type of environment. In this case, rate cuts will be needed to stimulate the economy. Oil only has to settle in the $85 to $90 per barrel and that relaunches inflation. Currently, it is around $72 per barrel - not a million miles away!
Election calendar: 2024 is full of elections, supposedly 60 or more around the Globe. The terms in office range from 4 years (US) to 6 years (Russia). Those in the global limelight are:
The election timetables are spread across the year. Taiwan’s has already been held. The US is last in the calendar (November) so there won’t be any shortage of excitement – and volatility.
Our portfolios remain balanced between fixed income (where we have chosen to stay in short duration (short maturity) bonds as these are least prone to interest rate volatility while our equity exposure remains in undervalued (therefore less likely to lose money in further, market downswings) and cash-generating, quality defensive companies (these have better pricing power and dominant market share).